The Corporate Transparency Act

Effective January 1, 2024, the U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) will require certain newly formed and pre-existing entities to submit information regarding their beneficial owners pursuant to the Corporate Transparency Act (commonly referred to as the “CTA”). Consistent with FinCEN’s mission, the CTA is aimed at combating money laundering, tax evasion and other illicit activities, including the use of shell companies, through mandatory reporting requirements.

Under the CTA, certain entities will be required to file a beneficial ownership information report (a “BOI Report”) with FinCEN, disclosing such entity’s direct and indirect equityholders and controlling parties. Entities formed on or after January 1, 2024 and prior to January 1, 2025 have 90 days from formation to submit a BOI Report, while entities formed prior to January 1, 2024 have until January 1, 2025 to comply. Entities formed on or after January 1, 2025 will have 30 days from formation to submit a BOI Report.  All Reporting Companies will have an ongoing obligation to update beneficial ownership information in connection with any changes to the information initially submitted.

As enacted, the CTA contains nuanced rules as to which entities are required to comply, what specific information must be disclosed, and who may be exempt from reporting. Below is a high level overview of the CTA and the reporting requirements contained therein, as informed by guidance released by FinCEN to date. Every company should evaluate whether they are required to report and, if so, timely report.

I. Is My Company a “Reporting Company”?

A. Reporting Companies. Under the CTA, there are two categories of entities required to report to FinCEN (in each case, a “Reporting Company”): domestic reporting companies and foreign reporting companies. Domestic reporting companies include United States corporations, limited liability companies or similar entities formed by the filing of a document with a secretary of state or any similar office under the laws of a State or Indian tribe. Any entity formed under the laws of a foreign country and registered to do business in the United States or Tribal jurisdiction may constitute a foreign reporting company. In each case, Reporting Companies will be required to timely comply with the reporting requirements under the CTA unless otherwise exempt therefrom.

In the event that your entity constitutes a Reporting Company under the CTA, and does not otherwise qualify for an exemption, you will be required to submit basic identifying information with respect to your company, including its current principal place of business, jurisdiction of formation and any foreign qualifications, and tax identification number and/or employer identification number. You will also be required to disclose information with respect to each of your beneficial owners, as outlined in Subsection II below.

B. Exemptions.  The CTA exempts 23 specific entity types from reporting compliance, primarily because such entities are already subject to reporting requirements under other financial regulations (e.g., public reporting companies, banks, securities issuers, broker-dealers, investment companies and advisers etc.). In addition to these highly regulated entity-types, the CTA provides specific exemptions for the following classes of entities, including:

• Large Operating Companies: In order to qualify for the “large operating company” exemption, an entity must (i) employ more than 20 full-time employees (defined as employees who are employed on an average of at least 30 hours of service per week with an employer during any calendar month) in the United States, (ii) have an operating presence at a physical office location in the United States (physically distinct from the place of business of any other unaffiliated entity), and (iii) file a Federal income tax return for the immediately preceding year demonstrating more than $5 million in gross receipts or sales (either individually, or on a consolidated basis with its affiliates). Any amounts included in gross receipts or sales that are generated from sources outside of the United States are excluded from the $5 million threshold.

• Inactive Entities: The CTA exempts certain inactive entities from reporting compliance. An entity is deemed inactive if the entity (i) was in existence on or before January 1, 2020, (ii) is not engaged in active business, (iii) is not owned by a foreign person, whether directly or indirectly, wholly or partially, (iv) has not experienced any change in ownership in the immediately preceding 12-month period, (v) has not sent or received funds in an amount greater than $1,000 in the immediately preceding 12-month period, and (vi) the entity does not otherwise have any assets, including any ownership interest in any other entity.

• Tax-Exempt Entities: Tax-exempt entities governed by Section 501(c) of the Internal Revenue Code, political organizations and charitable trusts are exempt from the reporting requirements under the CTA.

• Subsidiaries of Certain Exempt Entities: Entities that are wholly owned or controlled, directly or indirectly, by any exempt entity (i.e., entities that qualify for one of the 23 enumerated exemptions) will also be exempt from CTA compliance. This exemption extends to, among others, subsidiaries of large operating companies, tax-exempt entities, banks, securities reporting issuers and investment advisers.

ii. Who Qualifies as a Beneficial Owner for Purposes of CTA Compliance?

The CTA defines a beneficial owner as any individual who, directly or indirectly, exercises “substantial control” over a Reporting Company or owns or controls at least 25% of the ownership interests of a Reporting Company. Subject to certain limited exceptions, the definition of beneficial owner is intentionally expansive in order to capture the individual(s) exercising actual control over an entity.

A person is deemed to exercise “substantial control” over a Reporting Company if such individual (i) serves as a senior officer of the company, (ii) has authority to appoint or remove officers or a majority of the directors of the company, (iii) is considered an “important decision-maker” of the company, or (iv) has any other form of substantial control over the Reporting Company. For purposes of determining whether an individual exercised substantial control over a Reporting Company, an “important decision-maker” is any individual who directs, determines or has substantial influence over important decisions made the Reporting Company, including decisions regarding the Reporting Company’s business, finances and/or structure.

In determining whether an individual owns or controls at least 25% of the ownership interests of a Reporting Company, the CTA takes into account all classes of equity held by such individual, including but not limited to shares of stock, membership interests (or units), profits interests, convertible instruments including warrants (whether or not such instrument is treated as debt), options, put and call rights, and any other instrument or arrangement establishing ownership.

iii. What are the Penalties for Non-Compliance?

Any willful failure to report complete or updated beneficial ownership information to FinCEN, or the willful provision of false or fraudulent beneficial ownership information, may result in civil penalties of up to $500 per day for each day that the violation continues, or criminal penalties including imprisonment for up to 2 years and/or a fine of up to $10,000. Any senior officer of an entity that fails to file a required BOI Report may be individually liable for the same in FinCEN’s discretion.